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The New Cable-TV Guy: Intel

Chip Maker Working on a Web-Based Video Service to Compete With Cable, Satellite Providers

Intel is working on a web-based video service to compete with cable and satellite providers, Sam Schechner reports on digits. Photo: AP.

By

Sam Schechner And

Don Clark

Updated March 13, 2012 3:46 p.m. ET

Intel Corp.
INTC -0.66%
is developing an Internet-based television service that it hopes to sell to U.S. consumers, a strategic shift by the chip maker as it sets its sights on the crowded pay-TV business.

Intel has for several months been pitching media companies on a plan to create a "virtual cable operator" that would offer U.S. TV channels nationwide over the Internet in a bundle similar to subscriptions sold by cable- and satellite-TV operators, according to people familiar with the effort. Intel wouldn't provide Internet access, which subscribers would obtain separately.

The TV offering would use Intel technology, and in at least some scenarios under consideration, would use Intel's name. In its presentations to media companies, Intel says it is making its own set-top box to carry the TV service, and it has demonstrated an interface for users to browse programs.

Intel has told media companies it hopes to launch a service by the end of 2012, though it faces hurdles such as scarce bandwidth and the high price of TV programming.

In at least some cases, Intel has asked media companies for "rate cards" that lay out what particular channels or types of on-demand programs would cost as part of its subscriptions, but it doesn't appear to have struck programming deals yet, one of the people said.

Paul Otellini, CEO of Intel Corp.
Steve Marcus/Reuters

The new effort would mark a big shift for Intel Chief Executive
Paul Otellini,
who has made clear his determination to move the company beyond the computer industry. Those efforts so far have include a series of TV-related businesses that have largely failed to gain much traction.

An Intel spokeswoman declined to comment.

Intel's maneuvers come as the broader television business undergoes a major shift, with people spending more time watching video on the Internet and mobile devices.

Several technology and electronics companies have considered offerings that would use the Internet to deliver bundles of live or on-demand TV channels. In recent months,
Sony Corp.
and
Dish Network Corp.
DISH -2.72%
have held exploratory talks about creating such services. Others, including
Google,Apple Inc.
AAPL -1.53%
and
Microsoft Corp.
MSFT -1.81%
, have spoken with media companies about the concept in the last year or so, but none appear to be moving forward immediately with any talks for the time being, media executives say.

Spokespeople for Sony, Dish, Apple and Microsoft declined to comment. A spokesman for Google, which has declined to comment previously on the topic, couldn't immediately be reached.

Hoping to get more of its chips into consumer living rooms, Intel has for years made the case that more processing power and better software are needed for services that appeal to consumers. But many of its efforts in the field, including a hardware effort called Viiv, and past partnerships with Hollywood content partners, have been scuttled.

Intel in October disbanded a group that had been involved with Google and others developing Internet-equipped set-top boxes and TVs sold directly to consumers. But Intel said it would keep supplying chips for set-top boxes used by some major operators, including
Comcast
and Iliad SA, a French telecommunications company that sells Internet, TV and phone service.

Last year it hired
Erik Huggers,
an Internet-services specialist who had helped the British Broadcasting Corp. launch a high-profile service called iPlayer. Mr. Huggers, who in October became general manager of a new group called Intel Media, has announced plans to set up an Intel center in London to work on "user experience" software for TVs. Few other details have emerged about his group's efforts, but he has indicated that TV-related services are part of the focus; in a video of a presentation Last summer, Mr. Huggers said the company might "go further up the food chain" in the TV business, beyond offering chips for set-top boxes and assistance to customers.

It remains unclear whether Intel or any other company will succeed in launching virtual cable operators. Programming costs are one big obstacle. Incumbent cable, satellite and telecommunications companies already pay nearly $38 billion per year to license TV channels. Those costs are rising—cutting into video-distribution margins. Any upstart could face even higher costs because smaller operators often have to pay more per subscriber.

A virtual service could theoretically offer smaller or cheaper bundles than traditional cable subscriptions. Intel, for instance, had talked at times about offering, say, 50 channels, rather than 150, according to one of the people familiar with the matter. But media companies are likely to resist such shifts, at least initially, because they make money by selling big bundles of channels via cable operators.

Internet bandwidth could be another problem. Some tech companies have retreated from plans to become virtual cable operators in part because of an inability to guarantee enough bandwidth for high-quality video at all times of day, one media executive said. Cable operators, which also sell high-speed Internet access, could shift to usage-based Internet pricing if more people start consuming their video online. If that happened, consumers watching a lot of online video could end up paying much more for Internet access—cutting into what a virtual cable operator could reasonably charge its subscribers for a package of channels.

But the people familiar with the effort say Intel is undeterred about bandwidth, with technicians who say they can safeguard picture quality even on another company's cables.

A third issue could be many existing TV channels' lack of Internet rights to all of their own shows. That would mean some channels on a service like the one Intel is proposing could be reduced, at least initially, to a selection of shows in an on-demand format, rather than live. That could make a Web offering less competitive.

Some media executives say they believe a real virtual cable service could be two or three years away at the earliest. Others are even more skeptical.

"Several large firms have tried to put that package together and backed off," David Wells, Netflix Inc.'s chief financial officer, said of virtual cable operators in an earnings call in late January. "I don't think that is going to come into existence."